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ARGENTINA
Default over... for now
Andrés Gaudin
4/7/2005
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Government negotiated debt with private creditors, making hard-to-meet commitments.

No one dares to deny that, in general terms, Argentina’s debt swap with its private creditors was an accomplishment for President Néstor Kirchner. Few outside the government, however, show as much enthusiasm as the president.

Nearly all 329 senators and deputies gave a standing ovation to Kirchner on March 1 when he enthusiastically announced, in his annual message to Congress, "the country is no longer in default after having made the best negotiation in the world’s history."

After a long negotiation, Argentina closed one of the most complicated chapters in its history by ending the default of US$81.8 billion of its $181 billion foreign debt. A total of 76.15 percent of bondholders accepted the swap, renouncing around 50 percent of the bonds’ face value.

Although the government asserts that the debt was reduced to $125 billion, it failed to include the 23.85 percent of the bondholders who did not take part in the swap. The $19.5 billion corresponding to those investors bring the real debt to $144. 5 billion. These bondholders intend to go to international courts to try to collect the full value of their bonds.

"Now the debt is better distributed over time —it has been extended to 2042— a higher proportion is placed in pesos and the interest rates are lower," said Economy Minister Roberto Lavagna. The existing debt at the time of the default was in dollars and was growing at "exorbitant rates," he added, while praising the swap.

An eternal fiscal surplus

"What the minister does not say is that a debt that was not being paid will now have to be," said Socialist Party deputy Héctor Polino.

This year alone, between interest and principal, Argentina will have to pay $13 billion and another $12.5 billion in 2006. March, the first month of "post default" was especially tough: Argentina paid $661.3 million of debt that came due for payment.

In order to meet the obligations generated by the debt swap and the preliminary accord signed with the International Monetary Fund, Argentina will be obliged to maintain for the next 37 years —the term of the debt— a primary fiscal surplus of 3 and 4 percent to guarantee the debt payments, which will make fiscal adjustments necessary.

"The people will pay for debt restructuring by enduring an eternal fiscal surplus," said Claudio Katz, a member of the Economists of the Left (EDI), adding: "A country cannot live under the tutelage of an eternal adjustment."

After the swap, almost all of the public debt was converted to pesos that will be ajusted according to inflation. Thus, the amount of the obligations will be tied to the evolution of internal prices.

Before it was the peso-dollar parity that affected the debt. Now the trigger would be inflation. According to various private entities, each point increase in prices will make debt prices rise around 1.5 billion pesos ($517,000). The government estimated inflation this year 8%, but it reached 2.5% in the first two months of the year.

Inflation vs. wage rises

In January and February some isolated groups of private sector workers obtained small raises — those in the public sector have had their wages frozen since April 1991. According to free market economists, these small adjustments influenced the price rises in the first bimester.

In statements to the press, right-wing deputy of the Progressive Democratic Party, Alberto Natale, said that the government "cannot afford to let the situation get out of hand at a time when inflation has reappeared. It cannot permit massive salary raises which, as we all know, are a big inflationary factor."

It is almost impossible, however, that there is no pressure for salary rises in a country where the average monthly salary of a worker entering the labor force stands at around 400 pesos ($138) and when the National Statistics and Census Institute (INDEC) calculates the basic basket of goods for a family of four in 760 pesos ($262) a month.

"The president knows that the country will not change from one day to the next and he knows that the swap does not solve any of the pending problems, beginning with the terrible social debt," said economist Claudio Lozano, director of the Institute of Studies and Training of the Argentina Workers Federation (CTA).

According to the National Institute of Statistics and Censures (INDEC), unemployment fell to 12.1% in the last quarter of 2004 from 14.5% in the last quarter of the previous year. But this does not include the more than 2 million unemployedpeople who receive a monthly subsidy of 150 pesos ($50). If these were included, the percentage would rise to 16.2%.

At the end of 2004, 48.9% of the work force was employed in informal jobs. This meant that more than 5 million people do not have labor or social rights entitling them to a retirement pension, family salary, holiday bonus, vacation, unemployment compensation, health and life insurance, among other benefits.

"In the medium term the most harmful thing is the uselessness of the swap," Katz warned. "The perpetual fiscal surplus is unsustainable and there are no previous experiences that this is viable in Argentina or in the world. In a few years it will again be show that the debt is unpayable and that another default is possible.


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